What happens to the balance sheet of Trump Taj Mahal if billionaire investor exchanges debt for equity?

An Atlantic City casino, the Trump Taj Mahal, has been struggling financially in recent years like many other casinos in the city. In 2014, four of Atlantic City’s casinos closed their doors, including the Revel, Showboat, Trump Plaza, and the Atlantic Club.

Billionaire investor Carl Icahn holds $286 million of the Trump Taj Mahal’s debt. In late 2014, Icahn indicated he would be willing to trade the $286 million in debt he holds for equity. In addition, he indicated that he might be willing to invest additional funds into the casino if certain deals could be reached with state and local officials.

Questions

What is the primary benefit to the Trump Taj Mahal if Icahn exchanges the debt he holds for equity?

Why might Icahn be willing to make the exchange of debt for equity?

Assume that the debt is exchanged for equity. Does the debt ratio for Trump Taj Mahal increase, decrease, or stay the same?

Instructor Resources

These resources are provided to give the instructor flexibility for use of Accounting in the Headlines articles in the classroom. The blog posting itself can be assigned via a link to this site OR by distributing the student handout below. Alternatively, the PowerPoint file below contains a bullet point overview of the article and the discussion questions.